A Disaster under Many Points of View
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A Disaster under Many Points of View

The Ides of March is the 74th day in the Roman calendar, corresponding to 15th of March. According to the historians, it was marked by various religious observances and was a deadline for settling remaining debts in the ancient Rome. The date became more famous in the 44 BC when it was associated with the assassination of Julius Cesar. In our days the date will be remember by the day Credit Suisse lost almost a quarter of its value in the stock exchange ( all time low), forcing SNB (Swiss National Bank) and FINMA ( Swiss Financial Market Supervisory Authority) to issue a statement of support for the Swiss Bank and to offer a liquidity backstop of 50 billion Swiss francs under a covered loan facility and a short term liquidity facility.

In the first sentence of the press release of the Swiss National Bank is written:” … there are no indication of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market”.

During the weekend UBS “agreed” to buy Credit Suisse in a deal pushed and orchestrated by Swiss authorities. The note written on 8th of March by Credit Suisse for reassuring employees, clients and investors is already paper for the archives. We will come back later on this.

Meanwhile, what is happening in US? For putting it simple, there is a turmoil which is rocking the banking sector igniting a crisis unseen since the GFC ( although not comparable): we started with Silvergate Bank ( it started its own process of liquidation on the 8th of March), followed by SVB ( Friday 10th ), Signature Bank (it passed under the control of FDIC on Sunday 12th), First Republic Bank ( it received 30 billion USD line deposit from other US banks on the 16th of March; the equity is at 25 USD down from 130 USD) . It is not just crypto risk as the first superficial critics and haters started to announce, it is not only the tech sector. It is unfortunately something bigger, a general malaise which is spreading across the banking space. A certain part of the banking sector if we want to be precise.

I see here a mismanagement of finance from medium domestic US banks.

There are already many comments available together with ongoing news, but the concrete facts and events need to be carefully analysed and understood by the Regulators and by the relevant Supervisors.

I will try to write and articulate my brief points.

1) Crying the bubble is an empty process and a misplaced idea at this moment. For what we know and can understand, it seems many US financial institutions have not been managed according to sound principles and Regulators have been too relaxed or distracted in some cases. There is a genuine concern on the health of US financial system, but this can remain still under control. What we discovered is the fact that banks of category IV (who benefit from a less stringent regulation in the current framework) whose total assets are up to 250 billion USD, although not systemic, can cause a calamity if they fail together one after the other like a domino game. They seemed to be no relevant up until yesterday. It is a big hole in the legislation discovered out of nowhere.

2) The FED and its policy have no responsibility on the capital, liquidity and risk management undertaken by the executives of financial institutions. The FED controls the banks and should have probably imposed tougher standards for the institutions that today appear loosely governed. Regulators should have probably checked with more attention the rapidity of expansion of some banks and how they were achieving their deposits and assets growth. It is unthinkable how the FED’s monetary policy could become the hostage of banks executives

who apparently committed gross mistakes in managing their businesses. The Powell’ speech of the first week of March, in the semi-annual testimony on monetary policy before the Senate Banking committee, appears today with the current glasses already very empty and dated. If that speech is still valid, and I think it is, and the bank turmoil will remain contained, it is still possible to assume a projection of a couple of rate hikes from the US Central Bank, in line with what was announced a couple of months ago. In this way and for conclude this point, I totally disagree with the line of thought that thinks that a tight monetary policy works in large part through creating problems for banks biting into their profitability.

3) Regarding Credit Suisse it will be necessary to write a book. The problems have been originated years ago and it is impossible in few words to go over the various accidents that forced the bank to close the 2022 financial year with a net loss of 7.3 billion CHF. The events of last week have been guided by the panic and Swiss authorities provided with a first intervention the oxygen and the time that were needed in those circumstances. But these circumstances changed again (why, how?) during the weekend and the deal was sealed on Sunday: UBS agreed to buy its Swiss rival. Details are on the press release: I have more questions than I had on Wednesday. Serious questions.

4) One word on Central Banks. Connecting to the words of the President of ECB Lagarde pronounced in the Q&A of Thursday 16: it is true Central Banks have a lot of “creativity and tools” to address market tensions and ease troubled financial conditions. Central Banks are ready to provide any kind of additional facilities if they are needed. All true. I simply add a comment: the tools are there and can be activated any time, but their usage must show coherence with the steps undertaken on the monetary policy side. What is happening in the US with the new Bank Term Funding Program (press release of 12th of March) and other measures undertaken by US authorities, leave some doubts and provoke some questions and criticism. Considerations of moral hazard are left aside. One small remark: the text of the ECB prepared for the monetary policy decision on Thursday 16th was very well pondered and written; congratulations. I invite every portfolio manager to read it multiple times.

5) Portfolio activity. It is difficult to write something valuable when the US Treasury curve changes in few days the spread 2Y10Y from -105 bps to -35 bps. In Europe the XOVER is more than 170 basis point higher from the first week of March. Volatility in rates is brutal, mainly driven by the fly to quality. HY bonds, disappeared from primary and from the screens of dealers in secondary market except rare cases (short term names, FRNs, industrials, telecoms). Everyone was busy with the CS name, crossing, selling and buying, the many bonds with different seniority and characteristics available from the issuer. With this in mind, I encourage everyone to read my previous two posts where I was advising to reduce AT1, beta credits, and to be ready to catch a credit spread market widening that indeed happened just after few days. Stronger than I thought. I warned about systemic risk, but we are not yet there, despite CS turbulence contaminated many European financials without any valid reason (The AT1s, a mainstream and matured market nowadays, have clearly showed their nature: a good instrument in normal or bullish market conditions, a terrible investment in turbulent times, a nightmare when tensions escalate in the banking sector provoking an indiscriminate sell off). The volatility of the last Wednesday (and today) brought to my memory some days of 2008 (with due proportion), but we still have time to think how to shape our credit and rates portfolio exposure. I am convinced we will have further surprises down the road (in the financial world), but I cannot write them in a public post. There will be not a straight line in the path of credit spreads. But there are incredible opportunities in IG and HY world in Europe and in US; we must keep the logic agile and at the same time coherent and to make sure that “then” does follow the “if” which it so often does not (the

words have been taken from a response to Paul Krugman written many years ago by some economists). Regulators and Central Banks in primis in this essential exercise. Swiss authorities: no comment.

Note of the editor: Sergio Grasso has been manager of CLO vehicles since 2006 in 1.0 and 2.0 structures. He started to invest in CLO junior mezzanine debt in 2004.

Author:?Sergio Grasso, Director at?iason?

Previous Market Views available?here?


IASON Company is successfully advising financial institutions on many market risks and cooperate with the main actors for implementing the most convenient and advantageous policies that fit and exploit market circumstances and volatility.

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